Authentidate: Proxy For Growing Telehealth And Healthcare Administration Markets

| About: Authentidate Holding (ADAT)
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Summary

Authentidate's solutions benefiting from increased pressure to reduce healthcare expenditures.

Attractive business economics with recurring revenues from razor & blade and subscription-based revenue models.

Potential catalysts include a pickup in order rate for its largest customer and increased investor awareness and interest following Authentidate's participation in a recent investor conference.

48% upside implied by three-year target price of $1.32 derived from comparable transaction valuation multiple and future revenues based on industry growth estimates.

Elevator Pitch

Authentidate's (NASDAQ: ADAT) telehealth and healthcare administration solutions are expected to grow in demand going forward, as healthcare organizations and providers seek ways to cut costs and improve patient outcomes at the same time. In addition, its products and services are offered in the form of either razor & blade or subscription-based revenue models, resulting in recurring revenue streams for the company. Based on a comparable M&A transaction of another telehealth services provider, I arrive at a target price of $1.32 for Authentidate, representing an upside of 48% from its share price of $0.89, as of December 22, 2014.

Company Description

Authentidate is a provider of secure web-based software applications and telehealth products and services that enable healthcare organizations to coordinate care for patients and enhance related administrative and clinical workflows. Its web-based services, delivered as Software as a Service (NASDAQ:SAAS) to its customers, include telehealth, hospital discharge and referral management solutions. Authentidate's telehealth solutions help to connect patients with their care providers via remote monitoring and communications, using its Electronic House Call (an easy-to-use FDA 510(k) cleared monitoring unit with a built-in blood pressure monitor) and Interactive Voice Response (allowing patients to enter vital signs such as height and weight by phone) products and services. It also offers workflow automation solutions, where its systems automates and speeds up the hospital discharge planning process between hospitals and homecare providers, and provides an automated process for the exchange and update of healthcare orders and other supporting documentation required by healthcare payors for reimbursement of medical claims. Authentidate's largest customer, inferred from its 10-K filings and conference call transcripts, is the U.S. Department of Veterans Affairs, which accounted for approximately 58% of its fiscal 2014 (year ended June) revenue.

Market Potential

The number of patients using telehealth services is expected to grow more than six-fold from 227,000 in 2012 to 1.3 million in 2017, while U.S. telehealth revenue will quadruple to $707.9 million over the same period, according to a report published by IMS Research in 2013. Management estimates that telehealth market for remote patient monitoring is estimated to be $7 billion annually in 2013, considering the inclusion of new solutions like Interactive Voice Response. These strong growth expectations for the industry are hardly surprising, when one considers the amount of money that is spent on healthcare every year and the potential cost savings brought about by telehealth products and services. $3.8 trillion was spent on U.S. healthcare expenditures in 2013, compared with $2.6 trillion for 2010. In addition, readmissions, approximately one in five Medicare patients returning to the hospital within a month, caused the government to fork out $17 billion in additional costs annually.

Authentidate's telehealth or remote patient monitoring solutions help to reduce hospital readmissions and the cost of patient care by focusing on close monitoring and preventative care. A study by Massachusetts General Hospital, Center for Connected Health showed that there was a 18%-31% reduction hospital readmissions for heart failure patients with remote monitoring intervention; and Authentidate's experiences with its own products validate these findings. Kennedy Home Health Care conducted a pilot one-year telehealth program for 29 patients using Authentidate's telehealth solutions in 2013, with the aim of reducing the 30-day readmission rate for patients with chronic conditions. The results were encouraging, with patient hospital stays reduced by approximately 79% to 0.59 hospitalizations per year and more significantly, net cost savings amounting to $176,940 and an Return on Investment of 7.8 times on the program.

Similarly, the hospital discharge and referral management markets have significant growth potential, with management estimating that these two markets are worth $750 million annually. Despite the importance of hospital discharge systems in streamlining the discharge process and improving facility utilization, the penetration rate is low with only approximately one in five of 6,000 hospitals in U.S. using such systems. Authentidate's hospital discharge solution assisted CentraState Medical Center, a 284-bed hospital in Freehold, N.J., to automate its discharge process. The results from optimizing patient length-of-stay and bed turnover were a 54% improvement in patient placement time and a 93% reduction in workflow costs for CentraState Medical Center. On the other hand, referral management is also a big headache for hospitals, as the labor-intensive processes and the prevalence of errors increase administrative costs and slows down reimbursements. Authentidate's referral management solution has gained favor with clients such as Homecare Concepts, a home medical equipment company operating in New York City, which has benefited from the reduced average order completion time from 30 days to 8.5 days, following the implementation of automate referral processing.

The common theme running though Authentidate's telehealth and healthcare administration solutions is the significant emphasis on both cost reduction and improvement in patient outcomes at the national and local levels. Authentidate is well-positioned to capitalize on the growth in these markets because of its ability to offer SaaS solutions either as stand-alone applications or an integrated suite of care solutions for healthcare providers and the fact that synergies between its products and services provide huge cross-selling opportunities.

Business Model

All of Authentidate's three business segments boast attractive economics. Authentidate offers its telehealth solution via a razor and blade model, with a one-time sale of patient monitoring equipment and recurring monthly monitoring service fees (approximately $130 to $150 per month per patient). Authentidate's healthcare administration solutions also benefit from steady streams of recurring revenue. Its hospital discharge solution is sold as a recurring monthly subscription, charged at $3,000-$5,000 per hospital location; while it also offers its referral management solution as a monthly subscription package, with downside protection in the form of transaction minimums and upside from revenue charged based on transaction volumes.

Potential Catalysts

Potential catalysts that will assist in a re-rating of Authentidate's stock price include a pickup in order rate for its largest customer and increased investor awareness and interest following Authentidate's participation in a recent investor conference.

Authentidate disclosed at its most recent results release in the first quarter of fiscal 2015 that the order rate with the U.S. Department of Veterans Affairs has picked up significantly and is now approaching levels last seen when it reported its best quarter a year ago. During the earnings call, CEO Ben Benjamin also highlighted that the U.S. Department of Veterans Affairs 'continued to increase the size and scope of their telehealth program with respect to the condition they're trying to monitor and a number of patients they plan to enroll.' If either the U.S. Department of Veterans Affairs enrolls more patients than expected or Authentidate secures a greater share of the new patients, Authentidate's share price should react positively.

On December 3, 2014, Authentidate participated in the LD MICRO Conference, with Mr. O'Connell "Ben" Benjamin, the CEO, presenting on behalf of the Company. LD Micro is an investment newsletter firm that focuses on finding undervalued companies in the micro-cap space, and the LD MICRO Conference is a platform created by LD Micro to arrange for selected micro-cap companies to present and conduct private meetings with its investor base. With 240 listed companies presenting at this year's LD MICRO Conference, I expect a significant number of investors focused on micro-cap stocks to have participated in this investor conference and had the opportunity to enhance their understanding of Authentidate's business model and growth potential.

Valuation

Authentidate generated $4.8 million of revenue in the trailing twelve month period. Assuming it can grow its top line by a CAGR of 32% (similar to telehealth market's 2012-2017 growth rate forecasted by IMS), it should deliver a top line of $11 million in three years' time. Medtronic (NYSE:MDT) acquired CardioCom, a clinical telehealth services business, for approximately 4-5 times EV/Revenue in 2013. If I apply this comparable transaction multiple of 5 times EV/Revenue to its estimated fiscal 2017 revenue of $11 million and assume a net cash position of zero, Authentidate should be valued at market capitalization of $55 million, or $1.32 per share, representing an upside of 48% from its share price of $0.89, as of December 22, 2014.

Variant View

Authentidate's key risks include legal proceedings and the maintenance of its listing status.

In January 2012, Authentidate's ExpressMD Solutions subsidiary was served with a summons and complaint in a purported patent infringement lawsuit filed by Robert Bosch Healthcare Systems, Inc. alleging that its "Electronic House Call" product infringes one or more claims of certain patents for Bosch's Health Buddy system. ExpressMD Solutions filed counterclaims seeking declarations that the patents are invalid and not infringed. This proceeding has been stayed by the court until the final decision on all of the reexaminations of the asserted Bosch patents have been completed by the U.S. Patent and Trademark Office.

According to Nasdaq Listing Rule 5550(a)(2), Authentidate has to maintain a minimum closing bid price of $1.00 per share among other requirements to maintain its listing status. On December 11, 2014, Authentidate announced that it has received formal notification from the Nasdaq Stock Market LLC, indicating that it has regained compliance with Listing Rule 5550(a)(2), by virtue of the fact that the Company's closing bid price of its common stock was at $1.00 per share or greater for 10 consecutive business days from November 24, 2014 to December 8, 2014. However, Authentidate's share price subsequently fell below $1.00 for eight consecutive trading days between December 11, 2014 and December 22, 2014. Authentidate faces potential issues compiling with Nasdaq listing requirements and this is not the first time that it has encountered such problems. Authentidate executed a 1-for-2 reverse split of its shares in August 2012 to avoid de-listing from Nasdaq. If Authentidate were to lose its listing, it will further shrink its pool of potential investors and adversely impact any further capital raising plans.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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